TaxTMI 
TaxTMI 
2018 (12) TMI 1202
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.... 3. We will first take up the appeal for A.Y. 2006-07 wherein the assessee has raised the following grounds:- "1. The Ld. Commissioner of Income Tax (Appeals)-1. Dehradun has erred in law and in the facts and circumstances of the case in rejecting the appellant's contention that the receipts of the non-resident are exempt from tax in India. 2. Without prejudice to the preceding ground, the Ld. Commissioner of Income Tax (Appeals)-1. Dehra Dun has erred in law and in the facts and circumstances of the case in rejecting the appellant's contention that the receipts of the appellant are taxable u/s 44BB of the Act. 3. The Ld. Commissioner of Income Tax (Appeals)-l, Dehradun has erred in law and in the facts and circumstances of the case in not deciding the ground of chargeability of surcharge and education cess himself and in directing to the AO to look into the appellants contention in accordance with law. 4. The Ld. Commissioner of Income Tax (Appeals)-l, has erred in law and in the facts and circumstances of the case in not directing the AO to delete the interest levied u/s 234B. 4. The facts of the case, in brief, are that the asses....
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....rocess, trade mark or similar property which has been clearly mentioned in Explanation 2 to section 9(1)(vi). Thus, the Assessing Officer was right in holding that such a payment was to be assessed u/s 115AA. (ii) The scientific knowledge vested in the software which has been permitted to be used by ONGC on payment of licence fee through which right to access and administer the system devised by the assessee has been obtained and, therefore, it does not partake the use of a finished product by customer on payment of tagged price. (iii) The software has been devised to transfer scientific knowledge and the ONGC has been privileged to access such information through granting of licence which means that payment of license fees has been as a consideration for scientific work. 7. The alternative plea of the assessee that the receipt of the assessee should be covered u/s 44BB was also rejected on the ground that the said payment is covered u/s 115A. Regarding surcharge and education cess, he has given direction to the Assessing Officer to examine the matter in accordance with the law and interest levied under various sections has been held to be consequential. 8. ....
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....ith retrospective effect, which brings into the consideration received for right to use the computer software within the ambit of 'royalty' as contained under that section, now, it is the settled proposition by various courts including that of the Delhi High Court that the said amendment to section 9(1)(vi) cannot be read into the definition of 'Royalty' as contained under the DTAA. In support, he relied upon DIT vs. New Skies Satellite B.V. & ors. (2016) 382 ITR 114. 10. In so far as the levy of surcharge, the ld. Sr. Counsel submitted that the rate prescribed under DTAA cannot be increased by any surcharge levied under that. However, regarding education cess, he agreed that the same would be covered within para 2 of DTAA. As regards levy of interest u/s 234B, he strongly relied upon the judgment of the Hon'ble Delhi High Court in the case of DIT vs. GE Packaged Power Inc. (2015) 373 ITR 65 (Del) and also the assessee's own case for assessment year and also the judgment of Uttarakhand High Court in the case of DIT vs. Maersk Company Ltd. (2011) 334 ITR 79 (UK). 11. On the other hand, the ld. DR strongly relied upon the order of the CIT (A) and pointed out that the judgem....
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....ril 1st of each period unless either the Member or CMG gives a termination notice. A termination notice given by the Member or CMG shall be effective on the first day of the Membership Period following the calendar year in which it is given. A termination notice given by CMG for breach of contract shall be effective when received by the Member, if not remedied within 30 days. (2) The Membership pursuant to this Membership Agreement can be terminated, but this Membership Agreement (contract) shall survive membership termination. (3) The Member's license to use any CMG technology, including Source Code, received by it prior to the effective date of such termination notice shall continue perpetually subject otherwise to the terms of this Membership Agreement. The other relevant clauses for fees and payment, terms of membership and assignment, etc. are as under:- "(5) Each member of CMG has the right to reasonable enjoyment of Membership and each member shall respect such right of other members. (6) Membership is subject to the provisions of CMG's incorporating documents and bylaws. CMG is a member organization and the members establish member....
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....eration and benefit; and lastly, members will not, at any time, assign its interest or rights under the Membership Agreement. Thus, there is no transfer of any 'right' or 'right to use' any copy right in the software of CMG's technology. The members are only given the right to use only for their internal purpose. Since the assessee is a tax resident of Canada, therefore, benefit of India-Canada DTAA in terms of section 90 of the Act has to be given. Para 3 of the Article 12 of Indo-Canada DTAA reads as under:- "3. The term "royalties" as used in this Article means: (a) Payment of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work including cinematograph films or work on film tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the p....
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....copyright, so the transfer of title to the original physical material does not by itself operate to transfer the title to the copyright........' Thus, the rights associated with the copyright should be of such a nature which enables the recipients to commercially exploit the product and if such exclusive right for commercial exploitation of the product is not given, then it cannot be reckoned that 'use or right to use in a copyright' has been given by the recipient to the payer. A limited right to use a copyright product with a non exclusive license to the end user being some kind of license program through the computer to the end user does not tantamount to the use of copyright or right to use the same. A distinction has to be drawn between the passing of a right to use and facilitating the use of a product for which the owner has the copyright. It is a sine qua non that some kind of enjoyment or all the rights which the copy right owner has, is necessary to trigger the concept of "royalty" as defined in the treaty. The non exclusive and non transferable license enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated righ....
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....ranted depends upon the type of work; however such activity must include the exclusive right to: 1) copy the work (reproduction right); 2) issue copies of the work to the public (distribution right); 3) rent or lend the work to the public (rental or lending right); 4) perform, show, or play the work in public (public performance right); 5) broadcast the work (broadcasting right); 6) include it in a cable-programme service (cable right); 7) make an adaptation of the work, or do any of the above acts in relation to an adaptation (right of adaptation); 8) the right to authorize others to carry out any of these activities. 18. Further section 51 of the Copyright Act enlists copyright in a work which shall be deemed to be infringed; and section 52 specifies the acts which do not construe infringement of copyright. For the sake of ready reference relevant portion of section 51 and 52 are reproduced hereunder:- "51. When copyright infringed- Copyright in a work shall be deemed to be infringed (a) when any person, without a licence granted by the owner of the copyright or the Registrar of Copyrights under this Act or in contravention of the conditions of a licenc....
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....omputer programme from a personally legally obtained copy for noncommercial personal use. " 19. From the aforesaid provisions, it can be inferred that 'copyright' is not a positive right but a negative right, i.e., right to refrain others from exploiting the work without the copyright owners' consent or license. The copyright in a work remains with the copyright owner and the purchaser has not bought any part of it and he cannot lawfully enjoy any of those exclusive rights, reproduction, adaptation or the like, which ownership of the copyright preserves exclusively for the copyright owner. Purchaser may buy the copyrighted article and can use the article as he deems fit, but it does not enable him to use the article in a way which infringes the vendors' right. 20. Here in the present case, from the reading of the relevant clauses of the argument, it is quite ostensible that no use or right to use of a copyright in the software has been ever divested either to the distributors or to the end users. Even for the sake of argument, it is accepted that copyright has been transferred, then requirement of law is that, assignments of the copyrights has to be complied with ....
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....Nothing in sub-section (2) or sub-section (3) or subsection (4) or sub-section (5) or sub-section (6) shall be applicable to assignment made before the coming into force of the Copyright (Amendment) Act, 1994]". 21. Thus, the mode of assignments should be by writing and sub-section (2) of section 19 requires that the assignment of copyright in any work must; identify such work; specify right assign; the duration of the assignment and the territorial extent of the assignment. In none of the agreements, it can be seen that there is any kind of assignment of copyright." 16. The Tribunal has also taken note of the commentary given in OECD Model Tax Convention on Royalty and also the judgment of the Hon'ble Delhi High Court in the case of Nokia Networks, DIT vs. Infrasoft Ltd. and CIT vs. Alcatel Lucent Canada (supra). Thus, if one goes by the definition as enshrined in the Treaty read with relevant provisions of Indian Copyright Act, 1957 and also the relevant Agreement amongst the parties, it is seen that the payment for CMG's membership by the ONGC is purely for non-exclusive, non-transferable licence to use the technology only for the internal purpose. There is neith....
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.... that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. * Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article" Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. * Just because one has the copyrighted article, it does not follow that one has also the copyright w it. It does not amount to transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for 'copyrighted' article. This sale consideration is for purchase of goods and is not royalty. * The license granted by the assessee is limited to those necessary to enable the licensee to operate the program. The ....
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....or his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. * There is no transfer of any right in respect of copyright by the assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Act or under the DTAA. * The licensees are not allowed to exploit the computer software commercially, they have acquired under licence agreement, only the copyrighted software which' by itself is an article and they have not acquired any copyright in the software. * In the case of the Assessee company, the licensee to whom the assessee company has sold/licensed the softwa....
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.... of the software is not royalty under the DTAA. * What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. * The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income. * In view of above, it is concluded that the Tribunal was right in holding that the consideration received by the assessee on grant of licenses for use of software is not royalty within the meaning of article 12(3) of the DTAA between India and USA 18. The aforesaid observation and the ratio have been further reiterated in the judgment of Alcatel Lucent Canada (supra). Thus, in view of the binding judicial precedents and discussion made above, we hold that nature of payment as received by the assessee through ONGC in terms of the aforesaid agreement cannot be characterized as 'royalty' and, therefore, the same is outside the purview of taxation in view of Ind....